The tragedy in Surfside has prompted some readers to ask about the possible impact of this event on Miami home prices, and the Miami Case Shiller index.
As a one-off event the direct impact would be small, as (I believe that) the condos would be dropped from index as "the pairing process is also designed to exclude sales of properties that may have been subject to substantial physical changes immediately preceding or following the transaction."^1 As with other immediate disasters, the likely condemnation of the rest of the building will put owners in the place of finding another place to live, marginally increasing demand. This was the case in New Orleans (post hurricane Katrina) and Houston (after Harvey). Home prices (on the remaining homes) rose as supply immediately dropped.
in addition, the geographic area referenced by the Case Shiller indices is quite large, and the coverage extends far inland. (See map). In fact, >7700 paired trades during March were included in the most recent index update.
However, if people believe that Surfside was indicative of longer-term climate issues, the results might differ. There wouldn't be the immediate loss of supply that occurred in the above two examples, but possibly a change in mindset that might impact longer-term demand.
Fears of the structural integrity of buildings might cause owners to sell, and future buyers might be wary. A preference for retiring in Florida might focus on more inland properties.
At a minimum, one might expect similar buildings to deal with inspections, and the costs and delays associated with remediation.
Further, if insurers believe that rising sea levels undermined the reclaimed landfill upon which this building had been constructed, owners might face dramatically higher insurance premiums.^2
Finally, this event might be the issue that prompts Miami government to address issues related to the more frequent flooding that has occurred over the past few years on Miami Beach, and to raise property taxes to pay for protection (e.g. seawalls and drainage projects).
While there is a set of CME Case Shiller MIA futures (see table and graph), some might want to just express a view on MIA versus a more national index, and not have to be subject to absolute price levels.
For this, one might consider HPHF Ratio Agreements.
The graph below illustrates that the ratio of the Case Shiller (NSA) MIA/10-city index ratio has been in a narrow range for the last few years, indicating that MIA index and 10-city index levels have moved in tandem (on a percentage basis). A bear on MIA (relative to the 10-city index) might want to look at "selling" the ratio, while someone thinking that MIA will continue to match National prices might consider buying the ratio at a discount to spot levels. See my June 5th post for a discussion on how such an agreement would work using Atlanta as an example.
I'm looking to stir the pot on this debate and would take either side of an agreement for expiration in Feb 2022 or Feb 2023 on a $100k exposure. Anyone looking for a longer expiration should contact me, as I'd be happy to tout your axe and to try and find a match going the opposite directions.
Note that all agreements would be structured as HPHF Ratio Agreements so please review the more detailed explanation on my website.: https://www.homepricefutures.com/hphf
Also, while this blog centers on agreements for MIA, I'm open to facilitating an agreement on many of the other top 25 cities.
Feel free to contact me if you have any questions about this blog, have any trading ideas on Miami, or any other city, or if you'd just like to learn more about how home price index derivatives might be used in hedging strategies.
Thanks,
John
^1 See https://www.homepricefutures.com/resources for a link to Case Shiller methodology
^2 See https://www.sciencedirect.com/science/article/abs/pii/S0964569119309470 for details.